The Peculiar Practice of Taxing Public Worker Income

With the demonstrations by public sector trade union workers going on across America, there are several thoughts on the topic that have popped into my mind as of late. While the topic of Wisconsin’s public trade union workers is tempting, it’s not my concern right now. What caught my attention today is the connection between public sector jobs and income taxation. There are many things you can say about income taxes, and there are many things you can say about public sector jobs. The first is immoral, unjust and disruptive to the productive sector of the economy. The latter is where the taxes are inevitably spent. While a discussion on whether or not taxes should exist or whether or not we need public sector jobs is a fair discussion, we’ll leave that for later.

For now, please think about the following question: Why do people in the public sector pay income taxes?

A silly question, you might think. You may also say it’s obviously easier and also fair not to distinguish between private and public sector jobs when taxing people. That is, however, besides the point. What is the economic benefit of having all people employed in the public sector paying taxes? The endless amounts of administration that goes into keeping the system up is already profound, but the waste of collecting taxes from people payed 100% from previously collected taxes is at best a big drain of resources. If those employed in the public sector payed no taxes, there would be less administration going into collecting taxes from these people. Much less paper work and less public sector jobs needed to be filled.

I think all taxation on income should be abolished for everyone, especially for those working in the private sector, but as it stands, the paradox of taxing public sector income baffles me. Why not just pay people in the public sector what they get after tax and not tax them at all? And should these people have tax deductible expenses they today could get back, why not just give these expenses as a bonuses on their salaries if necessary? I don’t like the concept of tax credits – it only creates extra layers of bureaucracy that dabbles in social engineering, but since it already exists, giving bonuses would virtually have the same effect as today’s system. There is to me two very good reasons to why this would make sense to do. First, the administrative costs you’d save by not having to pay attention to taxing public sector employees. Second, if people were given a tax relief, this would only apply to private sector jobs, giving only private sector employees more money in their own pockets. Public sector jobs would never be affected by tax reliefs and this would result in them having received a permanent pay cut. It would also lessen the apparent numbers that make up the excuse by government for receiving smaller tax revenues to use in their spending. Perhaps this would also add another inhibition to increase spending (obviously not the case, since deficit spending rules supreme, but still…). The actual revenues of government would also not be affected, since the only resources they have at hand are what they take from the productive sector of the economy. As mentioned, whatever public sector employees earn is what has already been taxed. There are no real “losses to revenue”, only savings in administrative costs, which should result in more tax cuts for the private sector.

Downsides? Harder to rally public sector employees to the cause of electing politicians that wishes to cut taxes. You would likely also create an even more polarized population dividing the private vs the public sector into more distinct political factions than they are today. Those working in the public sector wouldn’t think twice about raising taxes for their political goals, as higher taxes wouldn’t concern them. The possible good things about these downsides? The enemy is easier to spot and the private sector would be willing to stand more united against government oppression. If supporters of the public sector wished to increase taxes, they would not be able to hide behind the mask of “altruistically suffering from the same taxation”. They would more directly become enemies of the private sector, and unable to portray themselves as servicemen for it. There would be a deadlock between political factions, and raising taxes could become far more unpopular than it is today…

… Or it wouldn’t worry people too much after all. Who knows? It will never become a reality, but I find it a peculiar phenomenon, and the “what if” fascinates me.